Open any (literally any) history book and you will find that historians (and people) believe the course of human history has been defined by an endless list of critical factors, events, and circumstances that ultimately defined the outcome.
This is true for very long arcs as well as very short arcs.
For example, this is true for long arcs like the thousands of years that make up Judeo-Christian history (or civilization history of the Far East). Millions of little things were critical in defining the outcomes and current state of affairs stemming from that history. Like Jesus. Like Black Death. Like the Crusades. According to historians, all of it mattered.
But history books also attribute such precision and importance for short arcs as well like the 4 years that make up World War I. Millions of little things were critical in defining the outcome of World War I and the subsequent state of affairs that resulted from it (including the Great Depression, World War II, and eventually the Cold War). Like the tangled alliances in Europe leading up to World War I. Like the invention of the machine gun. Like the invention of tanks and planes. According to historians, all of it mattered.
In our ever-specializing world, there is great appeal in finding that ever small thing that seems to make a difference on a grand scale.
While these individual factors certainly played an important role in making history exactly the way history played out, Capital Flywheels believes this largely misses the forest for the trees. Because it confuses the people and the characters and the means by which history conducts itself for the motivations and underlying causes that influence the actions of those characters and the means by which they act.
Did the machine gun change World War I? Yes. But that does not come anywhere close to answering why World War I happened. Did the entangled alliances matter? Yes. Without it, World War I would likely not have happened exactly the way it happened. But that also does not come anywhere close to answering why the alliances existed and why the decision makers of World War I felt compelled to create it.
Open any history book and you will see that there is always this funny chain of things…the cause and reason for some event always tends to be the result of some prior thing. For example, the Cold War. Well that was caused by the result of World War II. For example, World War II. Well that was caused by the result of the Great Depression. For example, the Great Depression. Well that was caused by the result of World War I and the ways that the world tried to respond to an event that changed the world on an unbelievable scale not seen since Genghis Khan conquered (and temporarily unified) most of Asia and Europe.
History, according to historians, is a mix of a lot of events just chained together and occasionally sprinkled with a few unexpected, unpredictable, uncontrollable events that causes other domino chains of their own. Like, perhaps, COVID-19.
That is history according to the historians.
Capital Flywheels, however, has a different view (and, hopefully by the end of this, I will have convinced you that it has important implications for investing).
One of Capital Flywheels’ core principles is to prioritize simplicity and avoid complexity.
In fact, when Capital Flywheels launched almost 4 years ago, the third post ever written was a post called, “Simple Investment Theses“, which laid out the importance of prioritizing investments that can easily be grasped by the marginal investor. At the time, Capital Flywheels believed that there was an irrational cancer within investment professional circles that prioritized evermore complex investment theses. Sometimes complexity pays, but Capital Flywheels observed that often complex investment theses were pushed simply for the sake of complexity and because it makes the author sound smart. While simplicity should not be taken too far either, simplicity often tends to be closer to the truth of things. In most circumstances, what is true is often simple once a truth is observed. The difficulty is in observing that truth.
In investing, being smart and being right is not always the same thing.
It’s no surprise then that investment professionals, many of whom have prioritized complexity over simplicity have been handily defeated year after year by not only the humble S&P500 index, but many retail investors that buy obvious stocks like Apple, Amazon, Google, and Microsoft.
What matters ultimately is returns…not how smart someone sounds or one’s ability to run over an audience’s intellect.
And that has been a core driving principle of Capital Flywheels.
The reason why I bring up that core principle is because Capital Flywheels observes this happening not just in investing but across every area of specialization in their own way.
Returning to the discussion of history and historians above…Capital Flywheels believes the very same phenomenon afflicts the historians as much as the investment professionals. Historians are mired in their own complex search for truth but fail to actually find it and understand the underlying drivers that chain together most of human history.
In this regard, Capital Flywheels humbly suggests a different interpretation of history…that much of human history makes far more sense (at least to me) when viewed through two very simple underlying drivers: Computation and Energy.
Capital Flywheels believes that every single event in human history, at a fundamental level, was and will be driven by the complex interactions of human society’s ever growing need for computation and energy. Computation effectively determines our collective abilities to understand, learn, and control our world and our destinies, while energy effectively determines our collective abilities to actually pursue our understanding, learning, and controlling of our world and our destinies.
For example, in Capital Flywheels’ opinion, the core driver of all wars throughout human history is energy and computation. Energy to continue to push one’s society forward. And computation, which ultimately defines one civilization’s advantages over another.
Computation can be in the form of technological advantages. Computation can also be in the form of organizational advantages. For example, several hundred years ago, free(r) societies that prioritized education for more people had a computational advantage because larger numbers of educated and creative minds have more computational output in the long run.
In fact, ideological differences are often just computational organizational differences in Capital Flywheels’ opinion. The difference between a democracy, a republic, a theocratic state, and an authoritarian state is more or less a question of how to organize a society’s computational assets. For example, the Communist regimes of the 1950s mostly failed because the state actively destroyed their computational assets (e.g. educated people) by stigmatizing the educated and destroying access to education. And on the other hand, in certain democratic countries today, the active desire of the populace to NOT be educated shows that democracies do not inherently lead to better computational organizational outcomes than perhaps other forms of government.
People can fight over a large many things. But the world would make much more sense if everyone understood that the main crux of any argument simply comes down to some discussion around computation and energy.
The development of human society is also largely centered around these two things.
While many people tend to believe humans are driven by greed and that greed has largely driven the advancement of society, the primary incentive driving human nature is more likely laziness.
If humans were not so lazy, we would still likely be living in caves, doing everything by hand. But humans are lazy, and laziness is a question of energy. In our infinite desire to to be lazy, human society is on an infinite quest to harness ever more energy.
Why did humans stop being hunter-gathers chasing antelope across the great African expanse? Because we are lazy and wanted food to come to us instead of us chasing after it. We solved this by creating farms where the food sits there, waiting for us to eat. This is a question of energy.
Why did humans fight each other over land? Because we are lazy and some land is more fertile than others. This is a question of energy.
Why did humans invent machines and create processes to improve our understanding of the world in order to invent more technology? Because we are lazy and machines allow us to do more per unit of energy input. This is a question of energy and computation. Energy drives all of society. And computation is the means to increase the efficiency of our access and usage of energy.
In Capital Flywheels’ mind, this concept is both simultaneous simple and true. Capital Flywheels first hit on this concept 15 years ago, and ever since then, history has made more sense. In fact, these two concepts has allowed Capital Flywheels to understand the US / China trade war more clearly over the last two years ahead of consensus.
How does this connect with investing?
Today, the two most interesting companies in the world (though, not necessarily the most interesting stocks) are two companies that push both of these dimensions – energy and computation – to their limits.
These two companies, in Capital Flywheels’ opinion, are Apple and Tesla.
Let’s start with Tesla.
While Capital Flywheels has long had a negative bias against Tesla stock (not because Capital Flywheels does not believe Tesla stock can have good returns, but because the risk is undefinable, and Capital Flywheels is confident in being able to find other good stocks without have to take undefinable risk), Tesla has always been a highly interesting company because of where it sits on these two dimensions.
In fact, back in 2013, Capital Flywheels remarked to a friend that now works at Facebook that Tesla should be viewed as an energy / battery company long before that narrative became consensus. The disappointing thing is that while Capital Flywheels understood Tesla’s potential in the two dimensions of energy (batteries and electrical power) and computation (software-defined mobility and autonomous), Capital Flywheels was not smart enough to take even just a small position that has now gone up >50x from the time of that conversation (Capital Flywheels’ will have to settle for slightly less impressive investments in Facebook, Netflix, and Apple).
Nonetheless, Tesla remains highly interesting today because of those two things. Automakers think Tesla is playing an autos game. But Tesla is NOT playing an autos game. Tesla is much more of an energy and computational company that just happens to be in the auto space.
And beyond that, Tesla’s sister company, SpaceX is even more impressive. SpaceX is now one of the leading rocket / space companies in the world and is competitive with governments. SpaceX (along with others like Blue Origin) are doing things that exceed what national agencies like NASA can do. And there is nothing at the forefront of technology that better represents energy and computation than rockets.
For example, doing things like this requires mastery of energy and computation:
Most companies tend to think of themselves as owning a bunch of assets, but the most interesting companies in the world are always the ones that think of themselves as having some sort of unique capabilities. Assets eventually degrade, but companies that understand and think of themselves as having core capabilities will correctly focus on continuing to improve those capabilities in ways that escape their peers.
Tesla is one of them. Amazon is one of them (Amazon does not think of themselves as owning a bunch of premier retail-related assets, but rather have functional core competencies like computing, logistics). Nvidia is another.
And, of course, Apple is one of them.
Since the founding of Apple in 1976, Apple has been serially underestimated. Capital Flywheels believes this is because investors and pundits largely look at Apple as a company of assets (e.g. the Mac in 1980s/1990s, the iPod in 2000s, the iPhone in 2010s). And everyone understands that assets eventually degrade and will become superseded. But what most people do not understand is that Apple likely does not internally operate as an “asset” company. Apple is very likely operating along what Capital Flywheels mentioned above as capabilities-driven. Apple likely understands what their core capabilities are, and that therefore determines what products they have the capabilities of making. The iPod is a different product from the Mac. The iPhone is a different product than the iPod. The Apple Watch is a different product from the iPhone. And the AirPods is a different product from the Apple Watch.
But what all of these things are held together by is a set of core capabilities along both dimensions of energy and computation.
Apple is very likely one of the few consummate companies in the world right now that have masterful control over both of those dimensions.
For example, Apple is leading in terms of computational power:
However, Apple is not only leading in computation power but also in computational energy efficiency. Apple’s A-Series ARM-based mobile chips have been able to rival Intel’s PC chips in performance for a few years already.
And as one of the world’s largest buyer and researcher of lithium batteries, Apple likely has as competitive an understanding of batteries as Tesla.
Why does this matter?
This matters because for most of Apple’s history, pundits have long questioned the company’s ability to come up with new hits. However, this misunderstands how Apple (and Tesla and Amazon and Nvidia and others) can continue to surprise and continue to lead even while millions of companies are chasing the targets on their backs. These are companies that understand core competencies and their understanding of those core competencies allow them to understand what is possible and what isn’t.
The greatest evidence of this comes from the launch of the iPhone – Competitors that did not outright dismiss the potential of the iPhone actively claimed that it was not possible to create a touchscreen device in a package as small as an iPhone.
But those companies clearly did not have the core competencies that Apple did in terms of computation and energy.
And in the same way, Apple’s core competencies in computation and energy may soon unleash the next computing paradigm in the form of augmented reality glasses (Update 8/9/20: The previously linked video is no longer available online. The link now directs to an article that summarizes what was revealed in the video).
To close the loops, Capital Flywheels observes that most of human history is largely driven by two things – Energy and computation. The people and companies that understand these two elements and have mastery over it are likely to continue to define and redefine the future as we know it.
Part of Capital Flywheels’ philosophy is not only to own the greatest businesses with strong balance sheets, but to pursue companies that can serve humanity’s ever-growing demand for more energy and more computation.
While every company talks about supply and demand, there are only two true supplies and demand. The supply of computation and energy and the demand for computation and energy. Companies can talk about demand for logistics or smartphones or bicycles or oil or housing…all of it is derivative to computation and energy. The companies that control computation and energy will cut across industries and revolutionize the world.